Origination processes for commercial mortgage loans are usually a costly and time-consuming undertaking. As opposed to the origination of loans for residential property, the loan origination process for commercial property involves significantly more complex work in evaluating the risks of a potential lending opportunity. Also, unlike residential real estate due diligence activities, until recently there has been little industry-wide consensus as to an accepted standard or protocol, which causes unnecessary inefficiency.
For residential loans, a loan authorizer (who may be an employee of the lender) approves the loan based upon standards which, generally speaking, are used consistently in the residential mortgage market. For instance, a prospective borrower provides the lender with information regarding the amount of the loan desired and certain preliminary financial information about the borrower (e.g., gross household income, length of current employment, etc.). The amount of due diligence usually involves inspecting and appraising the property to be mortgaged and performing a credit check on the borrower. A loan is granted to the prospective borrower if the bank determines, in accordance with the above-described procedure, that the borrower is qualified.
The origination process for commercial mortgage loans is materially different from the loan process discussed above. Usually an extensive amount of information regarding the property and principals involved in the financing is gathered, synthesized and verified, making the underwriting process time-consuming and expensive. For example, cash flow underwriting based on historical income statements, rent rolls, revenue and expense source documents (e.g., bank statements, tax returns, utility bills, management and service agreements and leases) may be required to be collected and analyzed. In addition, appraisal, engineering, environmental and/or crime reports on the property may also be required to be gathered and examined. Because the breadth, depth and scope of the due diligence exercised for any given property can vary and because the lack of an industry standard has resulted in variations with respect to work scopes, methodologies and report formats, it is difficult to share the expense of underwriting with other lenders.
To compound the above discussed inefficiencies, few loan inquiries lead to a loan origination making the origination process for commercial mortgage loans costly. Prospective borrowers commonly shop around to various lenders for the best loans and therefore submit applications to numerous different lenders. Expensive staff at each lender have to review every new loan application. Since only one lender can fund a loan with the prospective borrower, most loan inquiries do not lead to a successful origination of a loan and the lending institution is burdened with fruitless due diligence expenses. At the same time, borrowers are typically dissatisfied with the multiple application process because repetitive information is asked. Further, in some instances, lenders ask an up-front fee to cover their underwriting expenses. As a result, both borrowers and lenders alike suffer from the redundant, high cost efforts.
Online services have been developed to streamline the loan origination process and reduce costs. Presently, online services generally replicate the conventional manner of brokering loans in the form of loan referral systems. For example, an intermediary may represent the borrower in a similar manner as an offline broker and may form a traditional broker package to refer to appropriate lenders and advise the borrower during closing. In another known service model, an intermediary collects information online from the borrower, sorts the information and provides the borrower with standard term sheets from lenders that have pre-specified a desire for loans that match the borrower's submission. Once the borrower commits to a lender, the intermediary works directly for the lender as a due diligence consultant. If the lender contacts the borrower, the borrower is on his own to negotiate a commitment with the lender.
The majority of online systems currently established provide insufficient quality of underwriting and lack control over the information submitted by borrowers. As a result, initial lender pricing, proceeds and terms have a high degree of volatility between initial contact with a borrower and the closing of a loan. Most online systems require the borrower to first scan potential lenders and their very generic pricing and terms, before deciding which lender the borrower wishes to send his loan application. Negotiations are then conducted between the borrower and lender electronically. A system is needed which will allow firmer commitments of pricing of loans for borrowers up-front, as well as a higher degree of assurance that the loan closes.
Online auctions are known in the field of loan origination. One such system is described in U.S. Pat. No. 5,966,699 issued to Zandi. A method and system are taught for conducting an auction over a computer network in which lenders submit bids on previously approved loan applications.
It is desired that a service be provided to present a lender participating in an auction with more information regarding a loan request, so that the lender can better evaluate the risk of lending prior to bidding. A system that offers competitive pricing and terms among many lenders is also desired. It is also desired that such a system be conducted by using a computer network or networks, such as the Internet, which is accessible to a number of prospective borrowers, as well as a number of prospective lenders.
A system is needed to lower origination costs and standardize the origination process. It is further desired that an independent provider of underwriting perform a greater amount of due diligence before a lender is involved in the loan origination process. It is also desired that a service be provided that combines an auction with comprehensive underwriting. Efficiency is also desired in a streamlined underwriting, pricing and closing process.